Rocket Lab USA Will Ignite a 30% Revenue Growth Journey

The global 'space economy' is forecasted to be worth ~$1.8 trillion by 2035.

Roughly $800 billion is estimated to be made up of "backbone" business, such as satellites and rockets, and the services or software required to enable them, such as internet and positioning technologies.

The remaining $1 trillion is estimated to be made up of businesses which operate on top of that backbone. For example, super-accurate position tracking enables faster package delivery or even autonomous drone delivery. Higher quality (and cheaper) satellite photography enables farmers to inspect their crops from satellite images and compare growth between paddocks from the office rather than travelling around the farm all day. More geographically precise forecasting of weather enables those farmers to make better planting decisions around estimated rainfall.

Rocket Lab USA seeks to vertically integrate itself throughout the $800 billion space "backbone" in order to attract the customers operating within that $1 trillion top component of the 'space economy'.

Rocket Lab has achieved revenue of $436m through 16 annual launches of its Electron rocket, alongside its rapidly expanding 'Space Systems' segment. Roughly 1/3 of revenue comes from its low-cost rocket launches, with the remaining 2/3 of revenue coming from selling the satellites used in those launches to its customers.

To achieve $6B revenue by 2035 Rocket Lab must get its newest rocket, Neutron, operating in a similar low cost manner, to fend off competition, while maintaining high reliability to capture more of the faster growing, higher margin, Space Systems segment.

Neutron has a targeted launch price of around ~$50million, which would make it quite competitive with SpaceX's Falcon 9. Assuming Rocket Lab maintains its 1:2 split for launch revenue with space systems revenue; 40 annual Neutron launches by 2035, or 2.5x the current number of annual Electron launches would hit the $6B revenue target. Neutron is designed to be more reusable than Electron, hopefully reducing the minimum time between launches. Neutron's significantly higher payload may mean Rocket Labs can expand its space systems segment faster than it grows launch revenues.

Rocket Lab needs to start achieving positive net margins so it can transform from being a company that burns shareholder funds into one that earns enough cash to self-invest into its growth. Neutron's successful operation should be that turning point - but Neutron's failure would risk the entire company.

Rocket Lab's biggest risk is the difficulty of space flight and the challenge of managing working capital and the expectations of early customers; until sufficient scale can be achieved to cement space flight and Rocket Lab's role as an everyday part of the global economy. Keeping the cost of space flight low, rather than obtaining rapid expansion and greater public recognition, should continue to be the focus.

There are numerous other operators in Space Launch Services. However, almost all of them have very low flight cadence and/or reliability, meaning Rocket Lab should not see them as competitors they need to race against, but rather as entities bringing greater interest and investment to space flight in general. The fact that many of these other operators rely on massive government subsidies, or billionaire owners willing to swallow huge losses, compared with Rocket Lab's publicly listed position, demonstrates these 'competitors' aren't necessarily seeking to dominate Rocket Lab, but instead expand the space economy. Successful space launch operators located in countries not known for their stable investment environment, such as Russia, China and Iran, are also unlikely to connect with the broader space economy as Rocket Lab is seeking to do.

SpaceX is the one major true 'competitor' to Rocket Lab, particularly as they both operate successful launch vehicles in the USA and through Neutron will be competing for the same contracts, particularly government ones. SpaceX can fairly be acknowledged as being 'ahead' of Rocket Lab in space flight, however that is not necessarily a superior trait. Rocket Lab has the advantage of following SpaceX whilst avoiding some of SpaceX's costlier pitfalls. By starting with Electron, low cost has always been the mantra, unlike SpaceX, and carefully determining how much of each rocket to make reusable gives greater emphasis on costs. Rocket Lab has no current ambition for crewed space flight, something which has taken up considerable time and resources for SpaceX - particularly as very few crewed space launches have occurred to date.

This does not mean Rocket Labs will crush SpaceX by any means. Both companies will operate within their own segments. Neutron being smaller than Falcon 9 again focuses Rocket Labs on the 'lower cost per launch' and 'higher margin services' segment. Whereas SpaceX, through Elon Musk's vision of humans on Mars, is aiming for something truly out of this world. It is up to the individual investor to decide which approach is likely to be more profitable for investors.

Elon's recent role within the US government could be a risk to Rocket Lab if he is able to unduly influence government contract procurement, but that should be largely offset more broadly by customers who find Elon's political presence too unnerving to continue using SpaceX instead of Rocket Lab. Again, Rocket Lab needs to manage its working capital well to get through any bumps in the road.